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Cents and Sensibility Guy Steele |
Know why you are
investing, even during
a market rallyAfter enduring three years of falling stock prices, investors cheered when the market rallied somewhat during the first half of the year. But is the market rally -- any market rally -- reason to jump back into the investment fray?
Actually, if you're trying to achieve long-term financial goals, you probably should never take a "time out" from investing in the first place. Of course, that's easier said than done. During a long bear market, when your holdings never seem to go up, it can be difficult to convince yourself to keep putting in money.
And yet, this type of environment can present some favorable investment opportunities. Why? Because, by definition, a down market means that stock prices are relatively low. That's not to say that all stocks will be a bargain -- they won't. But if you look carefully, you can find some high-quality stocks selling for attractive prices during a bear market.
However, just as you shouldn't stop investing during bad times, you don't want to rush into the market simply because things are looking up. That's why, even during a market rally, you need to know why you're investing -- and what you're investing in. Ask yourself these questions:
>> Are you trying to "catch a wave?" Many financial experts have no trouble identifying the particular causes of bull or bear markets: A strong (or weak) economy; a jump (or drop) in investor confidence; positive (or negative) national or global events, etc. However, nobody can accurately predict how long a market will stay hot or cold. So, if you think you should be investing just because you're going to "catch a wave," you may need to re-evaluate your decision. To push the metaphor further, a rising tide does not lift all boats; some stocks will not do well even when the market surges. That's why you always need to evaluate individual stocks on their merits: Management, quality of products, earnings record, competitiveness within its industry, etc.
>> Does a particular stock meet your diversification needs? Ultimately, your investment success may not really depend on any individual stock, but rather on how well you choose a diversified portfolio that meets your individual risk tolerance and long-term goals. So, when considering a stock -- even one that seems to be really taking off -- you need to see how well it would fit into your holdings. It's hard to over-emphasize the importance of diversification. By spreading your money among a variety of stocks -- along with bonds, government securities and other investments -- you can help protect yourself against downturns that may strike one asset class particularly hard.
You'll find very few certainties in the investment world, but here's one of them: There will always be ups and downs. Rallies and slumps follow each other in an endless cycle. You can't control these events, and you probably can't totally ignore them either. But as long as you make well-thought out investment decisions that are appropriate for your individual needs, you can take control of your own financial destiny -- and that's a goal worth rallying behind.
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Guy Steele is a financial planner and head of the Pali Palms office of Edward Jones. Send planning and investing questions to him at 970 N. Kalaheo Ave., Suite C-210, Kailua, Hawaii, 96734, or call 254-0688
